Thursday, September 22, 2011

"A remedy in search of a problem"

In last weekend's WSJ, Clint Bolick had a column dealing with Arizona's struggle with apparently unfair and unnecessary federal government interaction with much of their activities, especially regarding elections. In it he had a statement which hit me as being, at times, appropriate to the world of GIPS(R) (Global Investment Performance Standards"): "a remedy in search of a problem." Mr. Bolick does not deserve (nor I suspect does he seek) credit for coining this phrase (a Google search identified its use elsewhere), but its appropriateness in many areas of our lives is fitting.

The recently circulated revised guidance statement for examinations (whose comment period recently ended) included suggested language which would have required verifiers to go directly to custodians and brokers for records to support the asset manager's claims. I believe this was a case of a remedy looking for a problem. The inconvenience and added cost should have been obvious from the start. We do not yet know what will make it into the final version, but hopefully these requirements won't.

I'm on record as opposing examinations, though my firm (The Spaulding Group) is quite willing to perform them for our verification clients (the vast majority of whom have decided (as we have) that they are an unnecessary expense). We believe our clients (and for that matter, all firms) should spend their money efficiently. In most cases, examinations are remedies in search of a problem.

I would include in this group of "remedies" the decision to abolish the use of carve-outs, except where cash is managed separately. There was no documented problem necessitating this move. And the change has caused headaches for many firms who had been using them since the early 1990s. 

One might expect that the GIPS Executive Committee will (if they haven't begun already) begin to consider what changes to make to GIPS; after all, the standards are to be reviewed every five years for potential changes. One would hope that if any are, that they will be minimal (the last round was quite extensive). Adding remedies in search of problems should be avoided.

When I was mayor of the Township of North Brunswick,  our resident gadfly suggested that for each new law (actually, ordinances in the case of municipalities) we introduced, two should be struck from the books. Not a bad idea. As Thoreau recommended in Walden: simplify!


  1. Bravo on your comment about the lack of necessity of limitations on carve outs. This is a pet peeve of mine; I believe the limitation creates a bigger problem that it hoped to solve.

  2. Steve, thanks for your comment. I think solid empirical evidence of a problem should be required before changes like this are made. Opinions are nice, but where's the proof? We have SO many clients who had to change the way they operate because of this prohibition.


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